Combine flour, baking powder, and salt. Combine milk and water. Add flour mixture to creamed mixture alternately with milk mixture, beginning and ending with flour mixture. Beat well after each addition. Stir in vanilla.
Beat egg whites (at room temperature) until stiff peaks form; fold into batter. Pour batter into 3 greased and floured 9 - inch round cake pans. Bake at 350° for 25 minutes or until a wooden pick inserted in center comes out clean. Cool in pans 10 minutes; remove layers from pans, and let cool completely. Spread filling between layers; cover top and sides with frosting. Garnish with reserved filling and walnut halves.